Sometimes your supply chain will deliver an old-fashioned, pre-database, non-FCPA related integrity issue: the old bait and switch.
Target Corporation has severed business ties with Indian textile manufacturer Welspun India (NSE:WELSPUNIND) after it accused the company of substituting cheaper cotton for higher quality Egyptian cotton.
Target has pulled more than 750,000 sheets and pillow cases from its stores and has offered customers rebates for any affected products manufactured since 2014.
Welspun, which derives more than two-thirds of its revenue from sales to the U.S., has a large U.S. clientele. Retailers Walmart, Bed Bath and Beyond, and JC Penney Co. have announced reviews of their relationship with the company. Welspun’s stocks have been pummeled as a result.
Walmart announced that part of its investigation involved review of documents from The Cotton Egyptian Association, which issue certification that a product is “Egyptian Cotton.” The cotton industry is an important economic engine in Egypt, and the association and the country have an obvious economic interest in maintaining the reputation of Egyptian cotton.
The Cotton Egyptian Association has announced its own investigation of Welspun.
For practitioners looking at supply chain risks, product claims based on a certification from an Egyptian NGO (Egypt’s Corruption Perceptions Index rank is 88) to a company in India (India’s CPI rank 76) might carry a certain level of inherent risk. The U.S. consumer class-action suit that may well follow would likely look carefully at the reasonableness of customer reliance on certification under such circumstances.
Welspun’s behavior, if true, is especially appalling from an important Indian company, one located in the state where M.K. Gandhi was born. India has a millennia-old tradition of innovation and achievement in textiles. Gandhi famously focused on homespun cotton as a source of resistance to British rule and an early version of the Indian flag featured the humble spinning wheel at its center. Indian law requires that cotton flags be spun from such handloom.
Like many Indian companies in similar situations, Welspun almost immediately announced that it would hire a Big Four accounting firm to find out what happened. The company engaged EY, which has been accused of cheating its client Bain Capital through accounting irregularities at an Indian company.
Russell Stamets is a Contributing Editor of the FCPA Blog. He was the first non-Indian general counsel of a publicly traded Indian company and was general counsel for a satellite broadcasting joint venture of a large Indian business house. He’ll be a speaker at the FCPA Blog NYC Conference 2016.
Just underscores the fact that the problem of counterfeit products is not limited to the defense/aerospace industry or the automotive industry; but, abounds throughout all industries. This is a correlative to Gresham's Law (bad money chases out good money): The same supply chain managers that are tempted to go to "low-cost countries" like China in the first place are likely to be tempted, or suckered, into counterfeit goods at low prices and/or good terms.
Interesting that the reason for the cancellation of the supply was quality of the product, which will affect its sales potential in their stores, not because of a human rights issue in the supply chain, which will likely not have any effect on sales.
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